Ready for retirement? Make sure you know about IRA requalifications first

requalification will go

requalification will go

Contributing to a traditional or Roth IRA can help you save money for your retirement on a tax-efficient basis. If you make a mistake with contributions or change your mind about them, IRA requalification allows you to correct it. Requalifying an IRA allows you to switch from one type of contribution to another. For example, you can change Roth IRA contributions to traditional IRA contributions or vice versa. If you are considering a requalification, there are some IRS rules you need to know. You can also talk to a financial advisor about the pros and cons of changing IRA contributions.

Understanding IRA Requalification

An IRA is a tax-advantaged retirement account that you can make contributions to annually, independent of any money you contribute to a 401(k) or similar work plan. There are two types of IRA contributions you can make: traditional or Roth.

Traditional IRAs allow you to contribute in pre-tax dollars, while Roth IRAs are funded with after-tax dollars. Contributions to a traditional IRA may be tax deductible and withdrawals are taxed as ordinary income. Roth IRAs allow tax-free withdrawals, although you must meet certain income thresholds to contribute.

Requalification allows you to change your annual IRA contributions from one type to another after the fact. Why would you want to do that? There are different reasons for requalifying ERI contributions. For example, you might do this if you:

  • You contributed to a Roth IRA, but later learned you weren’t eligible because of your income.

  • Originally contributed to a traditional IRA, then realized you can make Roth IRA contributions instead.

  • You have found that your traditional IRA contributions are not tax deductible, depending on your income and whether you are covered by a workplace retirement plan.

Generally, you can requalify IRA contributions in these scenarios if you haven’t filed your tax return for the year. You can requalify contributions up to the regular April tax filing deadline or the October deadline if you have requested an extension. The requalification applies only to contributions made for that tax year.

IRA Recharacterization Rules

requalification will go

requalification will go

The IRS sets the rules for IRA requalifications and it’s important to know how they work.

First, you should be aware that if you re-qualify the contributions, any income on those contributions must also be re-qualified. Then you will need to have a separate IRA to requalify the contributions. Your current IRA custodian can help you set this up if you only have one retirement account.

You must report requalifications on your federal tax return. Your IRA custodian should generate a Form 1099-R to help streamline the reporting process. Again, the deadline for changing your mind about IRA contributions is your usual tax filing deadline, either April or October if you’ve requested an extension.

There is no limit on the amount of your contributions that you can requalify and it can be a full or partial amount. However, Roth IRA conversion amounts cannot be requalified. The Tax Cuts and Jobs Act of 2017 also prohibits recharacterization of amounts transferred to a Roth IRA from another retirement plan, such as a 401(k) or 403(b).

How to requalify an IRA

If you want to requalify traditional IRA contributions to Roth contributions or Roth to traditional contributions, the easiest way to get started is to contact the company that holds your account. Your IRA custodian should be able to help you through the requalification process.

You will need to tell your guardian:

Your custodian should be able to calculate your contribution income that also needs to be requalified and provide the necessary tax forms to report it to the IRS.

If you are unsure whether an IRA requalification is the right decision, you may want to speak with a financial advisor before beginning the process. An advisor can assess your tax situation and help you determine which type of IRA is best for your situation and whether it makes sense to requalify contributions.

IRA Requalification Example

Having a reference example can make it easier to understand how reskilling works. Let’s say you decide to open a Roth IRA and make a $6,000 contribution for the 2023 tax year. You make the full contribution in January, only to find at the end of the year that you have earned too much money to qualify for a Roth IRA.

You decide to requalify this contribution, along with $400 of income, into a traditional IRA. You are not covered by a retirement plan at work, so you can also deduct your entire traditional IRA contribution for the year.

IRA Requalification vs. IRA Conversion

A requalification allows you to change your IRA contribution type in a single tax year. If you want to switch from one type of IRA to another permanently, you can perform an IRA conversion instead.

For example, you might consider converting a traditional IRA to a Roth account. Roth IRA conversions may attract investors who may not be eligible to contribute to a Roth account, depending on their income. You can also consider switching to a Roth IRA if you want to be able to withdraw your savings tax-free in retirement.

There is a catch, of course. When you convert traditional IRA assets to a Roth IRA, the IRS doesn’t just give you a tax transfer. You will still have to pay income tax on your traditional IRA contributions at the time of conversion. However, once you settle this, you will be able to receive qualifying distributions from your Roth account tax-free.

The essential

requalification will go

requalification will go

Recharacterizing the IRA can allow you to correct errors in pension plan contributions or change your mind about the type of contributions you are making for the tax year. If you think you might need to requalify IRA contributions, it’s best to start planning for this as soon as possible. Otherwise, you risk missing the deadline to do so.

Retirement Planning Tips

  • Converting IRA assets can generate useful tax benefits, however, it is important to understand how this may affect your tax liability in the short term, especially if you are converting a large sum of money which could leave you with a large tax bill to pay. Talking to a financial advisor about the pros and cons can help you decide if an IRA conversion might be right for you. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goalsstart now.

  • If you’re not yet using an IRA to save for retirement, you might want to consider the benefits of opening one. As mentioned, traditional IRAs can allow for tax-deductible contributions while a Roth IRA can offer tax-free retirement withdrawals.

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